According to a study by the Canadian Interactive Alliance (CIAIC), Canada’s interactive digital media sector has benefited from government assistance and public financing. However, gaps exist when it comes to the financial support of companies in early-stage development.
Many Canadian startups look to the US to finance their growth, as their need for capital increases. To keep Canadian startups in Canada, greater access to Canadian investment opportunities must be created.
“Governments may wish to consider increasing their investments in VC funds with a mandate to invest in the interactive digital media sector.”
A small number of private funds, such as North Innovation Fund, have been created to support interactive digital media. And it also should be noted that the study found that Canada’s angel investor community is becoming more structured and organized. However, they are looking for digital media companies to become more “investor-friendly.”
The government has made a significant impact in providing assistance to interactive digital media at the provincial levels, which has created clusters of digital media in BC, Manitoba, Ontario, and Quebec. However, funding mechanisms should be (1) broadened to increase their scopes, and (2) should encourage marketing and online exploitation of digital media.
Pebble’s Eric Migicovsky jump-started his company by selling 85,000 pre-sold watches and generating $10 million in advance revenue through Kickstarter. Unfortunately, Kickstarter isn’t readily accessible to Canadian companies. Migicovsky’s initial company was based in Waterloo (part of University of Waterloo’s Velocity incubator), and was bootstrapped by SR&ED tax credits. The opportunity to obtain financing was so lucrative, that he was forced to found a US corporation, and move all of his assets out of Canada.
Crowdfunding (or crowd financing) is defined as the collective cooperation of a network of individuals to pool their resources together, in order to support (or finance) the efforts initiated by other people or organizations. Websites like Kickstarter have created crowdfunding platforms over the Internet. According to an industry report released Tuesday by Massolution, just under $1.5 billion USD was raised in 2011 by crowdfunding platforms around the world.
According to the Globe and Mail, the “Jumpstart Our Business Startups Act” in the United States has rewritten securities law to allow business owners to seek capital from unaccredited investors, which legalizes the use of crowdfunding to sell shares to the public. Nick Bhargava, co-founder of North Carolina-based Motaavi (who is originally from Edmonton), explains that no such act exists in Canada, and without a national regulator, an entrepreneur would have to seek rule changes in each of the 13 provinces and territories in order to gain unencumbered access to the entire country, in order to make crowdfunding viable.
Crowdfunding sites are paid by commissions, and the smaller population of Canada makes crowdfunding websites in Canada less attractive buisiness opportunities. For entrepreneurs, the smaller investor base also means that small angel projects would raise thousands of dollars in Canada, when compared to the potential millions in the United States.
To follow are an incomplete list of some of the crowdfunding websites in Canada:
With the manufacturing economy still recovering from the last recession, corporate financing is difficult to come by. Many owners of small- to medium-sized manufacturers are looking for exit strategies, and may be hard-pressed to find one, because few financing options exist.
NorthSpring Capital Partners is a private equity firm that provides an option for owners of SME manufacturing companies who want to sell, preferably to the existing management team. Typically, the existing company managers are great operators, and they know how to run the business. Unfortunately, existing management often does not have the cash to purchase the company. The deals NorthSpring will finance are mostly in the $250,000 to $1 million range, and usually involve the vice-president or other senior managers of the company being sold.
NorthSpring’s goal is to help SMEs prosper under the new management ownership structure, so that the managers can own their business 100 percent within 5 years. The selling of the company to the existing management team is better for the company, because customers and suppliers will be more trusting to the existing management team. Please contact NorthSpring Capital Partners for more information about completing a Management Buyout or for details on growth financing.
Greg Smith, president of Canada’s Venture Capital and Private Equity Association (CVCA), described the current landscape of Canadian entrepreneurship:
“Canada has an historic opportunity to become an innovation leader by making major investments that enable our best technology businesses to realize optimal growth and compete on a global stage,” he said in a statement. “However, in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs.”
Without VC initiatives, small companies with big ideas are being caged by cash crunch – running low enough on cash so that it has a significant impact on operations. Exponential growth can also cause a company to be short on working capital. Business growth requires a steady cash flow, enabling the acquisition of equipment and personnel. Lacking VC, companies may be forced to unload assets or sell a part of the business to raise crucial funds.
The cheapest forms of financing are the sources taken for granted:
-Cash in bank account
-Revenue from sales
-Financing from tangible assets (accounts receivable factoring, purchase order factoring).
Aside from borrowing from friends and family, the next funding options come from cost-heavy debt or equity financing. Debt financing directs small businesses to traditional institutions, banks and credit unions, and many small businesses run into trouble meeting financing prerequisites. Equity financing or “share capital” – funding through selling common or preferred stock to individual or institutional investors – is dilutive in nature and requires loss of ownership and possibly control of the business.
In order to get to an operable stage, small businesses can also consider bridge financing and financing from intangible assets. Bridge financing is used to gain immediate cash flow while waiting for an expected inflow of cash. Basically bridge financing provides a forwarded payment for future sales or anticipated inflow of cash. Financing on intangible assets, such as SR&ED (Canada’s Scientific Research and Experimental Development credit program), is not often offered by the traditional institutions but is a non-dilutive form of bridge financing. North Innovation Fund (NIF) is one such source of funding, providing accrual SR&ED financing to support small business and entrepreneurs. NIF released their first Fund this month in response to the increasing demand of funding alternatives for start-up companies in Canada. SR&ED financing will bridge the funding gap for companies with R&D initiatives and new ideas to help make the leap to commercialization.
NIF offers a unique opportunity which includes support in identifying SR&ED activities and a friendly approach to funding. Initiatives like NIF will help push Canada to forefront of growth and innovation.
The Globe and Mail recently addressed the fact that in recent years, the relative impact of self-employment across Canada has been waning. Self-employment has always been an important feature of the Canadian economy; the OECD lists Canada as one of the highest concentrations of entrepreneurs within a working population. However in recent years, the ratio of self-employed persons to those working for someone else has dropped back.
Statistics Canada’s Labour Force Survey (ratio of self-employment to those employed by someone else):
- 13.8 per 100 in 1976
- 21.0 per 100 in 1998
- 18.2 per 100 in 2011
What might be some of the causes for this recent decrease?
Some obvious contributors may be the decline of self-employment due to (1) the retirement of baby boomers, and (2) business failures caused by the last recession. If this is the case, then it is even more paramount for the Canadian government to support new business startups. How can we effectively create new startups to displace the ones that have disappeared?
One of the issues that deters entrepreneurship is the current gap that exists between innovation and commercialization. Our best ideas are often acquired by US-backed firms because we may not be effectively funding business commercialization. Private venture capital is lacking in Canada, so without a doubt, the largest contributor to startup commercialization in Canada is the Scientific Research and Experimental Development (SR&ED) program. The SR&ED program provides refundable tax credits to start-up companies, for expenses that have already been incurred. However, it often takes 1-2 years for companies to see these refunds! This is definitely an area that requires improvement if we to remove the commercialization gap. It should be noted that innovative companies such as the North Innovation Fund have recently begun to offer SR&ED financing on unfiled SR&ED claims.
Changes to the SR&ED program are rumoured in the next federal budget. It goes without saying that the SR&ED program is critical to the survival of many small starts-up. Reducing or removing SR&ED will further decrease the likelihood that these startups will be able to commercialize their innovations, and create new jobs. Instead of cutting back funding to startups, we need to invest in startups, and encourage entrepreneurship in Canada in order to create future employment.
